Bankers & Today

Companies will make deceptive, misleading and high-pressured sales solicitations. Often principals fail to diligently supervise employees and agents in the conduct of their commodity futures activities.

They make deceptive, misleading and unbalanced sales solicitations; churn customer accounts and fail to uphold high standards of commercial honor and just and equitable principles of trade.

Soliciting people to invest without being registered. Engage in fraudulent solicitation practices.

They commit fraud in connection with the purchase and sale of commodity futures and options contracts for customer accounts by making false, deceptive, and misleading statements or omissions of material facts.

They commit fraud by churning customer accounts in a pervasive and widespread manner to generate commissions, without regard for the trading objective of customers; making fraudulent statements concerning, among other things, the likelihood of profits in trading commodity futures and options contracts, the risk of loss, and the experience and trading success of their company and salespeople.

Make communication with the public which operates as a fraud or deceit.

They directly or indirectly (1) Violate, aid or abet or induce directly or indirectly the violation of sections 4b(a)(i), 4b(a)(iii), and 4c(b) of the Act and sections 33.7(f) and 33.10 of the CFTC'S regulations involving cheating or defrauding or attempting to do so, or willfully deceive or attempt to do so in regard to any commodity/future order or contract, and (ii) violate Section 166.3 of the CFTC'S regulations by failing to supervise diligently the handling of commodity accounts.

They fail to prove by clear and convincing evidence that their registration would pose no substantial risk to the public.

They engage in acts and practices that violate the Commodity Exchange Act and CFTC regulations.

They make false statements on their registration documents filed with the CFTC by failing to list principals of the company due, in part, to their controlling financial interest in the company.

They fail to supervise diligently the handling of customers' commodity futures and commodity option accounts by failing to monitor sales solicitations made by its salespeople and by instructing its salespeople to misrepresent material facts to induce customers to engage in trading practices designed to maximize commissions.

The company officials, without admitting or denying any allegations, usually consent to the entry of a permanent injunctive order finding that their company violated the anti-fraud provisions of the CEA and CFTC regulations and permanently enjoining it from further such violations. Then they just wipe the slate clean and start a new company.

The courts often find "systematic, willful and pervasive fraudulent conduct" regarding violations of the law and CFTC regulations over a long period of time. Improper sales practices often continue even after the filing of actions with the principal's approval and active participation.
They violate NFA Compliance Rule 2-29(A)(2) by employing a high-pressure approach with the public.
Misrepresentations often include: the likelihood of profit and the possibility of loss in trading commodity options, the applicability and importance of the risk disclosure statement required by Commission regulations, their company's experience and reputation in the commodity industry, their success rate in trading commodity options, and the existence of an in-house research department and a staff of analysts.
They systematically engage in high-pressure sales tactics, typical of a boiler-room operation, and routinely make false or deceptive statements when soliciting customers. They provide little training to its AP's other than sharpening high-pressure sales techniques.
They encourage its salesmen to maximize commissions by pressuring and convincing its customers, through high-pressure and fraudulent sales techniques, to purchase inexpensive, significantly out-of-the-money options that were seldom profitable to the customer after commissions.
They typically charge its customers a commission of $175 per option to buy an option with a commission fee of $75 to offset an option transaction. The paramount goal of the sales operation is to maximize commission income by maximizing the number of options purchased by customers and by misrepresenting the profit potential of the options purchased for customers.
Numerous option accounts contained transactions in which the commission-to-premium ratio exceeded 100 percent, and that a majority of customers paid between 40-60 percent of their investment funds for commissions.
They encourage such high commissions by financially rewarding account executives based only on the volume of options purchased, and by discouraging or prohibiting the purchase of more expensive options. They accomplish their objective of maximizing commission income by encouraging its AP's to misrepresent the profitability of the options marketed by them and to misrepresent the impact of the commission structure on the profit potential of the options marketed to customers.

For example, one complaint alleged that over a 3 1/2 year period one company traded over 2,800 customer accounts and that over 90 percent of those customers lost all or substantially all of their money, while the company collected $12.8 million in commissions.

That one complaint also alleged that in just five months the company had 1,126 actively traded customer accounts, and those accounts had an aggregate net loss of about $5.5 million and had paid total commissions of approximately $2.6 million, which accounted for 48 percent of the net losses.

Another CFTC complaint alleges that, in a twelve-month period, one company handled approximately 988 customer accounts, which generated $3.16 million in commissions while customers lost over $7 million. Of the customer accounts handled in this period, 97 percent lost all or nearly all of their equity. For a five-month period, they handled approximately 1,019 accounts, which generated $2.2 million in commissions but resulted in 83 percent of its customers losing all or nearly all of their equity in an amount aggregating $5.2 million.
Their radio commercials operate as a fraud and deceit and are created and aired with a total disregard for the truth.
At the principal's direction the companies engage in a deliberate course of conduct to defraud and deceive customers.
Foreign Currency Fraud Victims
Representing to customers and prospective customers:
-- that they are guaranteed to make a profit as the result of an investment in commodity options,
-- that trading commodity options is virtually risk-free, and -- that disclosure documents required by CFTC regulation are insignificant or of little importance, or words to that effect.
Omitting to inform customers and prospective customers:

-- that a seasonal increase in demand for a specific commodity, such as heating oil and unleaded gasoline, in and of itself, will not necessarily result in increased value of the option on the given commodity, -- that past trends in futures prices on specific commodities do not necessarily forecast current profitability of options on futures contracts on those commodities, -- that currently known market news does not necessarily mean that a customer will make money by trading through them as currently known market news is usually already factored into the underlying futures price, as well as the option value, -- that, except possibly for in-the-money options, a rise in the price of the underlying futures contract does not typically correlate on a one-to-one ratio with a rise in the price of an option on that futures contract, -- that stop loss orders are not always effective in limiting risk of loss, -- that diversification of option positions does not necessarily limit risk of loss or increase profit potential for each option position purchased, and -- that, under certain market conditions, a customer may find it difficult or impossible to liquidate a position since market conditions on the exchange where the order is placed may make it impossible to execute a liquidation of the position.

They fail to obtain customer information in a proper manner.

They fail to maintain the amount of net capital required by Commission regulations, fail to notify the Commission of such and fail to keep current books and records.

Butterfly Spreads

Some fraudulent forex companies solicit customers to trade in an options strategy known as "butterfly spreads" aware of the consistently negative effect the strategy has on the ability of customers to make money over the long term.

They defraud its customers by placing matched buy and sell orders for futures contracts on U.S. futures exchanges. It then assigns trades to particular accounts to create a desired pattern of profits and losses.

They place orders to purchase and sell the same quantities of the same contract at identical or nearly identical prices. These trades generally are offset by another company, as day trades at the exchange clearinghouse, but are nonetheless listed as "open" in separate sub-accounts held in one company's name.

They then issue trading statements that falsely reported these closed-out day trades as remaining open. The one company uses these statements to falsely report profits or losses to customers by means of matching long and short positions from the various sub-accounts and falsely reporting to customers that such trades were mutually offsetting.

They falsely and deceptively confirm the execution of certain fraudulent transactions by suggesting that the purchases and sales listed side-by-side in the confirmation are mutually offsetting, when, in fact, they are unrelated trades.

They purchase for customer accounts, most of which were discretionary, butterfly-spread option positions, for which the firms assess a fee of $180 per option. The butterfly spreads consist of four puts or calls (two buys and two sells), resulting in four commissions for each butterfly option position, or $720 per spread.

The $720 commission is in addition to a 12 percent of equity, up-front fee charged. Along with the commission structure, they also institute a policy of minimizing the amount of customer money committed to the market as premium by purchasing less expensive "out-of-the-money" positions.

The butterfly spread trading strategy and commission structure was used to replace a previously charged 40 percent up-front fee and $60 per roundturn option commission after German courts were looking with disfavor on large up-front fees charged by brokers and were awarding damages to complaining customers.

This reduced the up-front fee to the 12 to 13 percent range, tripled the per option commission to $180, and allowed them to begin trading butterfly spreads for their customer accounts, which were mostly discretionary.

The fraudulent trading strategy makes it virtually impossible for customers to earn a profit on their investments given the commission structure and the trading strategy employed. In fact, almost all the butterfly spread trades expired worthless, or were exercised and assigned for a financial result of zero. Total losses consisting of commissions and premiums for 339 customers in one case were approximately $5.6 million, of which approximately $4.8 million, or 86 percent, were attributable to commissions (excluding the 12 percent fee deducted).

Non-Stop Losses
09/98 - The SEC filed a complaint and obtained emergency relief involving a Ft. Lauderdale company, International Capital Management, Inc. (ICM) that solicited investors with claims that they would profit from its foreign currency exchange program. .
According to the complaint, ICM used high pressure "boiler-room" telemarketing sales tactics to raise approximately $18 million from more than 1600 investors from October 1997 to early September 1998.
They told investors that they could obtain returns of 3%-6% per month and sent bogus monthly account statements that showed consistent profits.
ICM also told investors that 80% of investor funds would be held in a bank account and the remaining 20%, which would be used in ICM's foreign currency trading program, would be protected from significant losses by their purported use of a "stop-loss" order on every trade.
All of these representations were false in that the foreign currency trading generated a net loss for investors, ICM did not keep 80% of investor funds in bank accounts, nor did they use "stop-loss" orders on all trades.
The SEC's claim also named WorldCorp Traders & Co., Inc. (WorldCorp) as a relief defendant, alleging that ICM had transferred at least $10 million to WorldCorp., which used at least some of those funds to trade in foreign currencies.
The SEC froze all of ICM's assets and those assets of WorldCorp that were provided by ICM. ICM consented to a permanent injunction against future violations of the antifraud provisions of the federal securities laws and consented to the appointment of a receiver.
The receiver has recovered approximately $5.2 million and made an initial distribution to more than 1,600 investors and creditors of nearly $3.3 million, representing 19.6% of their claims, and continues to pursue actions against other defendants.
On July 6, 2001, Jared D'Argenio who pled guilty to one count of conspiracy to commit mail fraud and wire fraud faces a maximum sentence of five years in Federal prison. Later in the year Nelson N. Schembari pled guilty to one count of conspiracy to commit mail fraud and wire fraud and faces a maximum five years. Ken Tripoli pled guilty to one count of conspiracy to commit mail fraud and wire fraud and one count of money laundering and faces a maximum sentence of twenty years. Larry Tripoli pled guilty to one count of conspiracy to commit mail fraud and wire fraud and faces a maximum sentence of five years.